This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
It has been a terrible year for Netflix (NASDAQ: NFLX) investors. A sudden loss of paid subscribers has weighed heavily on the stock, which has lost more than 60% of its value so far in 2022. But the streaming giant could see a major turnaround in its fortunes sooner rather than later.
Netflix announced earlier this year that it plans to introduce an ad-supported subscription plan in addition to its existing tiers. The plan was expected to go live in 2023, but reports suggest that Netflix may have moved up the timeline to arrest its subscriber losses. It is hotly anticipated that the ad-supported tier could be launched as soon as Nov. 1.
Though the company is tight-lipped about the updated timeline, it reportedly expects 4.4 million subscribers on its ad-supported platform by the end of the year. However, JPMorgan analyst Doug Anmuth believes that this is just the beginning, and introducing an ad-supported tier could supercharge Netflix's long-term revenue growth.
An ad-supported plan could be a game changer
Anmuth estimates that 7.5 million subscribers could opt for the ad-supported plan in the U.S. and Canada by 2023, helping Netflix generate $600 million in advertising revenue. While that would be a small portion of Netflix's top line given that the company has generated $31 billion in revenue over the trailing 12 months, ad revenue is expected to jump substantially in the long run.
The JPMorgan analyst sees the ad-supported plan driving $2.65 billion in ad revenue by 2026 thanks to a solid subscriber base of 22 million. The global numbers are expected to be much higher. Netflix estimates that it could have 40 million ad-supported subscribers globally by the end of 2023, up sharply from its estimate of 4.4 million for 2022. Meanwhile, market research firm Omdia estimates that 60% of Netflix's global subscriber base could be on an ad-supported tier by 2027.
The company could generate 14% of its global revenue through ad sales after five years, up significantly from just 1% in 2023. It remains to be seen how much revenue this new plan could bring in for the company in the long run, but it wouldn't be surprising to see an ad-supported plan become a major growth driver for Netflix for two simple reasons.
Why this move could be a masterstroke
The first reason why an ad-supported plan could supercharge Netflix's growth is that it could make the company's plans more accessible. Reports suggest that Netflix could price the new plan between $7 and $9 per month. That could give customers a nice alternative to the company's most popular plan, which costs $15.49 a month.
Netflix's basic plan is priced at $9.99 per month, and the premium one goes for $19.99 a month in the U.S. But users are reportedly fatigued with the company's regular price increases -- as well as the surging inflation -- and these factors could lead them to quit the platform. So the introduction of an ad-supported tier that undercuts Netflix's basic plan could bring a sigh of relief to the company and help it arrest subscriber losses.
What's more, the company will now be in a stronger position to compete against rivals with a more aggressive pricing strategy. That could give Netflix a better chance of restoring subscriber growth and bolstering its presence in the fast-growing video streaming market, which is expected to hit $139 billion in revenue by 2027, a substantial increase from this year's estimate of $80 billion.
However, it is the second factor that I believe could be a bigger growth driver for Netflix. The company boasted nearly 221 million paid subscribers in the second quarter of 2022. The streaming platform also has high user engagement. In 2020, Netflix users were reportedly consuming 3.2 hours of video content per day, up from the pre-pandemic average of two hours.
Assuming Netflix users' average video consumption per day has declined to the pre-pandemic levels, given its massive user base, the company still provides a robust platform to engage digital advertisers. So Netflix could be about to enter a gigantic market, as video ad spending is expected to hit $180 billion this year. By 2027, annual spending on video ads could rise to $318 billion, which would be much higher than what the video streaming market is expected to generate.
As such, the digital ad market could unlock a whole new growth frontier for Netflix. Analysts are currently anticipating just 8.8% annual growth from the company over the next five years, but it could do much better than that as it has more than just the video streaming services market to tap into now. And with the stock trading at just 20 times trailing earnings now, compared to Netflix's five-year average multiple of 104, investors can consider accumulating this tech stock today.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
